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Definition

Absolute Form of PPP

Absolute form of purchasing power parity (PPP) theory that explains how inflation differentials affect exchange rates. It suggests that prices of two products of different countries should be equal when measured by a common currency. If a discrepancy in prices as measured by a common currency exists, the demand should shift so that these prices converge.

 It is based on the notion that without international barriers, consumers shift their demand to wherever prices are lower.

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